More sanctions against Huawei and TSMC setting down in Arizona seem to be different sides of one coin, but they aren't, really...
The industry was rocked last week by two U.S. announcements that seem interconnected. The first was the Trump Administration’s announcement banning any U.S chip and equipment sales to Huawei and ZTE. The second was the announcement that TSMC would build a state-of-the-art fab in Arizona. While national security may be a common thread in the two announcements, the factors and ramifications of the individual announcements are much greater.
War on Huawei and ZTE
The U.S. government has fined, banned, and now embargoed Huawei and ZTE for multiple reasons, including violating export controls of technology shipments to embargoed and sanctioned countries and charges of intellectual property (IP) theft. To be fair, China’s policy of requiring foreign countries to form a joint venture with a Chinese company and to share IP in order to do business in the country has been an open door to IP theft. Huawei recently accused the U.S. of implementing protectionary policies — when navigating Chinese protectionism has been part of doing business in China for decades.
Huawei has taken the brunt of the U.S. Government’s retaliation because it is the global leader in telecommunications equipment and second only to Samsung in global smartphone shipments. I have worked with Huawei in various capacities over the past 25 years and can attest to both the aggressive nature and engineering prowess of the company. However, it is an independent company owned by its employees and while it has benefited from Chinese government contracts like any domestic company, it is more independent than many other Chinese companies.
However, there are concerns by the U.S. Government that Huawei, in particular, could be coerced by the Chinese government to support spying for the Chinese government through its HiSilicon chips, telecommunications equipment, and consumer electronic devices. Since security, especially network security, is layered, creating such a solution would be challenging, but not impossible. In the end, however, exposure of such “back doors” would irreparably harm the company.
Thus far, both Huawei and ZTE have been able to survive and even prosper despite the efforts of the U.S. government to penalize the companies. However, the embargo of chips and semiconductor equipment will have a material impact on the companies, as noted in recent statements by Huawei and its CEO.
The impact will also be felt by companies throughout the electronics ecosystem. The impact on TSMC, the industry’s largest semiconductor foundry, is a loss of 14% of its annual revenues from HiSilicon and much more when you consider the chips from other companies intended for both Huawei and ZTE.
However, the impact will be felt throughout the ecosystem and may threaten the long-term potential of U.S. companies to sell into China. It also threatens to bifurcate the industries into two sets of standards — those driven by China and Chinese companies and those supporting U.S. policies — particularly in cellular communications. 5G was the first cellular generation that began with a single global standard because of collaboration from companies around the world. Without that collaboration, the industry would likely have multiple proposals and/or standards as with previous generations.
Reasoning for the TSMC fab
The second announcement was on an agreement between the U.S. Government and TSMC to build a fab in Arizona. With TSMC taking a hit with the embargo of Huawei and ZTE, it appeared to be politically motivated to work with TSMC while having a leading-edge foundry in the U.S. to manufacture components for the U.S. Government and military. Those, however, are just two factors in what is a very complex and political decision.
The Trump Administration has been pushing for U.S. and foreign companies to increase manufacturing in the U.S. Unfortunately, many auto manufacturers continue to move manufacturing and assembly out of the U.S, and efforts in the technology sector have been mixed. For semiconductor manufacturing, Intel is ramping it’s Fab 42 megafab and both Intel and Globalfoundries have committed to future expansion. However, efforts to coerce Foxconn to manufacture LCDs in the U.S have resulted in broken promises and a vacant building in Wisconsin.
The decision behind working with TSMC to build a state-of-the-art semiconductor fab in the U.S. is more complex than many people think. Having such manufacturing capabilities in the U.S. is not only good for government applications, but also applications that the U.S. government deems critical to keeping the U.S. competitive in the global market. One such area is cellular technology, where the U.S. has industry leaders, including Qualcomm for technology and chips, Apple for smartphones, and Google for software, applications, and services.
So, it’s not just what the fab would manufacture, but who it would manufacture for. Semiconductor products using leading-edge semiconductor processes include, mobile processors, PC processors, server processors, GPUs, FPGAs, and, increasingly, AI chips. This includes a wide variety of companies including AMD, IBM, Intel, Nvidia, Qualcomm, and Xilinx to name a few. Even electronic OEMs like Apple, Facebook, Microsoft, and Google are considering or are currently designing and manufacturing chips for their own products and services.
TSMC to Build and Operate 5nm Fab in US
In the past, the TSMC chairman has said that it is not cost-competitive to manufacture semiconductors in the U.S., which seems contradictory to the decision to build a fab in the U.S. But that statement is incorrect. The U.S is very competitive in manufacturing when the process is capital intensive — relying more on machines and highly-skilled labor (rather than being labor-intensive). Semiconductor manufacturing is capital intensive and the U.S not only has access to a highly-skilled labor pool, but it also has the resources and infrastructure to support a fab in various locations.
While there are fabs using older process technology scattered throughout the country, Arizona, New York, Oregon, and Texas currently have the best infrastructure and workforce for a new fab due to the manufacturing efforts existing by Globalfoundries, Intel, and Samsung. The Globalfoundries and Samsung facilities are already foundries and Intel has offered foundry services and/or to build a fab for foundry services to the U.S. Government in its efforts to bring more foundry manufacturing to the U.S. However, TSMC was still the best choice for numerous reasons.
TSMC not only has more global capacity than any other semiconductor foundries, it currently has a process technology lead and manufactures for the widest array of U.S. and other western semiconductor companies, and that includes Intel. In addition, Globalfoundries stepped away from competing on the leading-edge process nodes in a strategy shift in 2019, and Intel was not successful in foundry services in the past due to being inflexible in process changes and incompatible tools with other foundries. That’s not to say that Intel couldn’t become a foundry, but as Globalfoundries found out when it spun out from AMD, it is challenging to change the business practices and corporate culture to become a foundry.
Arizona makes sense
Selecting the optimal site for a new foundry involves a balance of resources and politics. In terms of resources, a fab needs not only skilled labor, it needs reliable power, water, chemical supplies, transportation and reclamation resources. Selecting a new fab is also political. Governments heavily compete for fabs because once they are in place, they operate 24 hours a day seven days a week for at least a decade. In addition, building a new fab can cost several billion U.S. dollars. Building a new site for a fab can easily be more than US$10 billion. And, companies are likely to leverage that investment for decades with future fab upgrades and expansions.
Many noted that TSMC’s plans for a fab that produces just 20,000 wafers per month is relatively small, but that would likely just be the first fab, or even the first phase of an initial fab. As a result, local governments offer tax incentives, land, and/or funding for new fabs and fab facilities. In this case, it appears that the U.S. government may also be involved in offering incentives and/or funding, but no details from the local or federal government are available at this time.
So, why Arizona? The state already has the infrastructure to support semiconductor fabs, especially in the Chandler area; plenty of land; a skilled labor force both from the universities, especially ASU which has a leading engineering program, and from the other companies in the area like Intel and Microchip; and it is also not prone to natural disasters. And yes, I’m positive that there are incentives from Arizona even though the information has not been made public. There is also little doubt that the U.S. government is trying to appease the Taiwan government and TSMC for the recent actions against Huawei and ZTE.
Blog: Politics Haunts TSMC’s US Fab Plan
The caveat to the TSMC announcement is that it could just be entirely political and may never result in a new fab. One scenario is that TSMC does not fulfill the commitment like Foxconn, another Taiwan-based company. Another scenario is that there is a change in the U.S. administration in 2021 that results in the deal being abandoned or any funds for the project being revoked. I/Tirias Research believes that the latter is a possibility, but that building a TSMC fab in the U.S. would be good for the U.S. by providing jobs and increased domestic supply. It can also be a win for TSMC and its customers by diversifying the company’s manufacturing geography (note that Taiwan is in an earthquake-prone region). Also note that even with more fabs in the U.S. most of the backend assembly and test of semiconductors is still performed in other parts of Asia because it is less capital intensive.
While the announcements had a common security thread, there was much more to each decision, including national competitiveness, economic benefits, and politics. While actions against China and particular Chinese companies may be deserved and long overdue, as some believe, the impact on the industry may be devastating both in terms of standards and growth. As far as the agreement for an Arizona TSMC fab, it may appear to leave some U.S. companies out, but it is a logical decision based on market dynamics, fab requirements, and long-term U.S. economic and competitive goals.
— Jim McGregor, principal analyst at Tirias Research